Lender doesn’t allow down payment money to be a gift

36 Replies

Hi,

After contacting a few lenders I’ve realized that the down payment money can’t be a gift. Does anyone have an idea how rigid is this rule and if there is a way to work around it. I did receive funds from my parents to purchase investment properties and would like to use a mix of my saving and their help.

Thanks.

If you are buying owner occupied properties then a percentage of the DP can be gift funds. If you are buying strictly investment property however, then the best way would be to transfer the money into your account and season it for about 2 months (leave it in the account for 60 days). After that it can be used as if it is your own money. 

Derek's idea also works. However i would caution you to only use it if you have a GREAT deal that you cannot wait two months to pursue. If you go that route it will definitely cost you in terms of reduced ROI from high points and interest. I use hard money to do flips but i know it costs me a lot more than bank money and account for it in the deal.

From your post i assumed you were looking more at buy and holds (since banks dont typically deal with fix and flips unless its a portfolio loan). If that is the case then be very careful with Hard money or it could bite you. I would say season the money and wait a couple of months.

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I used a gift for some of the down payment on my personal home.  My lender only required the person gifting me the money to write a letter stating that particular amount of money was a gift and had no expectation of being repaid back...(or something to that effect).

@Account Closed

I have yet to meet a hard money lender that actually verifies or cares if you DP is a gift. The ones i know want you to have skin in the game and that means you come up with 20% down. I know of investors that source their downpayments from credit cards and other people. I had the cash for my hard money loan but i never provided bank statements so there is no way for the HML to know the source of the funds.

Not saying you are wrong just speaking from my experience.

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I don’t think that for my investment goals – buy and hold, hard money is the way to go. I agree with @Nnabuenyi Anigbogu. Saying that, just like @Ken Vesely said, for my own residence financing the lender did ask for bank statements and asked me to verify and large transaction. I might have to wait for a couple of months I guess…

@Account Closed

I never said anything about your knowledge. I know you are a lender and have been in this game over half as long as ive been alive. I was just stating my experience for those not used to hard money. 

The lender im using for my current flip is actually not local but has about 50+ loans out here in the Chicago area right now and i know they have completed loans into the thousands over the last few years. They did not require my bank statements. They only asked for a personal financial statement and you have to bring the points and DP to closing.  The other two lenders i talked to stated point blank that they did not care where the DP was from. They only look at your statements to ensure you have the money to close.

It could be contrary to what is available in the market and most lenders might care about DP source but this has been my experience so far. im not doubting the truth of what you are saying.

@Doron Rice

For you primary residence you used a regular lender and not a hard money lender. All conventional lenders without fail will verify the source of your downpayment. Especially if they plan to sell it. Only portfolio lenders might have leeway but even then they will most likely verify and source all large transactions.

I used gifted funds to purchase an investment property recently.  I encountered the same thing @Jennifer T. did.  They just required the person making the gift to state that it was in fact a gift, not a loan, and did expect any repayment whatsoever.  No problem at all, just additional paperwork, of course.  This was through a mortgage company, not a bank.

@Matthew Locci, that was my case when financing my own home but a few mortgage company (not the bank) clearly stated that no cash gifts allowed in investment property.

You definitely can't use a gift on an investment property with a conventional loan (Fannie/Freddie backed) without committing mortgage fraud. 

If you season the funds and then apply, you're committing mortage fraud.  Sorry to say.

Try a smaller lender that doesn't sell to the GSE's, or maybe a hard money lender to acquire the property, then refinance it conventionally. 

Your best bet is to see if the person giving you the gift funds would be ok being added to the loan.

Originally posted by @Nnabuenyi Anigbogu :

If you are buying strictly investment property however, then the best way would be to transfer the money into your account and season it for about 2 months (leave it in the account for 60 days). After that it can be used as if it is your own money.

This behavior can be flagged as mortgage fraud by loan auditors.  Would highly recommend against this.

Much safer would be to:

1) Find a smaller lender (credit unions, local banks) that have looser underwriting terms.  The gift policy is usually a lender specific policy.  Contacting a mortgage broker who understands your situation could be helpful.

2) Create an LLC and instead of using the money as a gift, use it as an equity shareholder in the LLC.

Originally posted by @Frank Jiang :
Originally posted by @Nnabuenyi Anigbogu:

If you are buying strictly investment property however, then the best way would be to transfer the money into your account and season it for about 2 months (leave it in the account for 60 days). After that it can be used as if it is your own money.

This behavior can be flagged as mortgage fraud by loan auditors.  Would highly recommend against this.

Much safer would be to:

1) Find a smaller lender (credit unions, local banks) that have looser underwriting terms.  The gift policy is usually a lender specific policy.

2) Create an LLC and instead of using the money as a gift, use it as an equity shareholder in the LLC.

You learn something new everyday. I have had more than one mortgage officer recommend this strategy to me. And my research showed it was a viable strategy. This is the first time I've heard it called fraud. I'll definitely look into it some more. 

Well maybe a gift isn't allowed.  What about selling a valuable piece of art or trading card.  What about renovating his kitchen or maybe he can hire you as a consultant to teach him rei.

I guess it's all about intent.  Would it be possible to give it back to him and have him add you to his bank account?

Just throwing ideas out there. 

Thanks @Crystal Smith for this link - 

https://www.biggerpockets.com/forums/311/topics/148782-cash-gift-from-parents-cant-be-used-for-investment-purchase

Apparently it's not mortgage fraud @Nnabuenyi Anigbogu to season gift funds for 2 months. It's a lender issue not legal issue. 

@Doron Rice , bottomline: talk to more lenders, specially local banks and credit unions. Also in the link above, there are creative solutions to the gift funds not being considered gift funds to begin with. 

I will also ask my mortgage broker about this and ask a portfolio lender as well - and will get back to you.

Seems to be a lot of varying information regarding gift funds.  It really comes down to whether you are going to the secondary market for a loan or an in house bank loan.  Here is Fannie Mae's guidelines on the subject.  If you are wanting a bank loan, it will be lender specific...but probably not acceptable to most.  

https://www.fanniemae.com/content/guide/selling/b3/4.3/04.html

Scott England, Contractor in OK (#80003442)

@Scot Howat

Not doubting you but please show me where in the fannie mae guidelines it specifically forbids seasoned funds even if it is from a gift. From all my research i have only seen it said that gift funds cannot be used for investments but this applies to all funds that were deposited within the last 60 days. Funds deposited outside of that window is allowed as part of the DP. 

Afterall there has to be a cutoff point at which a gift is no longer considered a gift but seen as part of your own funds. I.E. If i got a 50k gift from my parents 6 months ago i should be able to use it for anything i want including investment loans. Where is the cutoff point? 2, 6, 12 months? Fannie mae seems to have decided it is at 2 months so i still believe it shouldn't be seen as fraud. 

This is all my interpretation (and advice of multiple mortgage loan officers). It could be wrong though

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I know that conventional lenders can ask for the DP not to be a gift as I have experienced that but is it that same if you place the gift in a self directed IRA and then use the funds for the purchase??

Jerry Stanford, Real Estate Agent in IL (#475166354)

Don't want to put words in anyone's mouth, but I think what @Scot Howat may be referring to is a scenario where you "season the funds" for 60 days and then you tell the lender (via an application or simple response to a question) that the funds are not a gift.  I could obviously be wrong though.

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